Financial management – The cost of running the business

In this series on the elements of your financial statements we’ve looked at the income, cost of sales and gross profit, all parts of the selling aspect of your business. Today, we’re going to look at the operational side – the costs associated with the infrastructure that enables you to sell your product.

In the olden days, the travelling salesman’s operating costs consisted of his mode of transport and his suitcase full of products. Nowadays, the costs of running a business are much greater, and grow as your business grows, to support the increased sales volume. Operating costs can fall into one of the following categories:

  • Physical infrastructure – costs relating to the office, the warehouse or the shop, costs relating to vehicles and other assets, as well as the costs associated with running the machines and equipment used to produce your product or service
  • Human infrastructure – the people costs, not just salaries, but welfare and development as well
  • Protection of the infrastructure and assets – such as insurance, security, data storage, liability cover
  • Compliance requirements – the cost of complying with accounting requirements, labour laws and SARS legislation, as well as governance rules
  • General running costs – the cost of items consumed by the process of running the business, such as telephone, data, stationery, food, amongst a host of others
  • Growth activities – costs associated with plans to grow sales and the business could include marketing, consulting, and anything else that the strategy requires

Operating costs are the first area to come under the microscope when the business profits need improvement. While there are sometimes a number of areas that can be reduced, there are also some critical elements. It is short-sighted to skimp on the maintenance of the equipment to save on costs when replacing the equipment is a much higher cost, for example.

Do you know what it really costs you to run your business? Do you know what the monthly operating costs are that need to be covered without fail? If you’d like a better insight into your business give us a call to walk you through the information available.

By |2018-04-24T11:05:43+02:00April 24th, 2018|Financial Management|0 Comments

The importance of good bookkeeping

As we begin a new tax year and new financial year for some here is a look at what good bookkeeping is and why it is important. Some have made mistakes in the past which may or may not have cost them financially but we need to correct them going forward to ensure we have a good bookkeeping system that is as efficient and appropriate as possible depending on the size of the entity.

What is the bookkeeping? It is the organisation and storage of accounting and financial information by a bookkeeper. It is of great importance that the information is accurately and diligently captured so it can show a true reflection of the entity’s financial performance for a given period.  The purpose of bookkeeping is to collate all the financial transactions and business activities for a period and summarise it for various uses.  These financial transactions are the true reflection of the entity’s performance and a guide as to whether strategies are working or not or if reviews need to be done.  Shareholders will want to know how their investment is performing, Directors will want to know if the strategies in place are working and the list goes on. A bookkeeper will record all these daily financial transactions and this is key to any business.

From the bookkeeper, the information is sent to the Accountant who then is responsible for reporting on the financial position of the entity as well as managing cash flows of the entity. The information or reports from the Accountant are then used to reach decisions on how to manage the business, invest in it or borrow money for future business deals. This information can then be audited if the entity opts for an auditor if it is statutory to get audited financials.

By |2018-04-19T11:54:11+02:00April 19th, 2018|Financial Management|0 Comments

Financial Management – Gross profit, the big brother of Net Profit

Profit is a fond topic for most business owners, but do you know the difference between gross profit and net profit? Gross profit is the net result of your sales and your cost of sales, in other words, the profit on the sale of your product. Net profit, is the larger gross profit less all other operating and financing costs, usually a fraction of your gross profit!

Gross profit can be calculated for various elements that make up the total sales of your business, such as the gross profit per product or product category. The total gross profit in your financial statements depends on the number of products you sell but doesn’t show you the amount of profit you are making per item sold. Most accounting packages have this information in one of the stock/item reports. It is very helpful to analyse the gross profit per stock item, as you can see which products make you the most money, and therefore what you should focus your sales effort on.

The same principle can be applied to business divisions. By calculating the gross profit per area you are able to see who is pulling their weight and who is not contributing enough towards the running costs of the company. For service businesses, it is also possible to calculate the gross profit per service by including the salaries of the staff, and other costs, into the calculation. Typically service businesses keep some form of timekeeping, where it is possible to see how much of a person’s time (and therefore cost) can be allocated to the various services they perform, even better if individual staff members can be allocated to a specific service. Accounting packages are not set up for this level of analysis, so a spreadsheet is often necessary.

It may be easier to understand the gross profit as a percentage of sales rather than a rand value. Knowing that a product makes an R5 gross profit doesn’t have as much meaning as knowing that the gross profit is 75% of the sales price. Using percentages, you are also able to compare products and the value that they add to the operations of the business.

It may be necessary to dig a little into the accounting information to get a real picture of the gross profit of the business. Should you need a spade or a little help digging, let us know.

 

 GP – service GP, per product, overall, per division – % vs rand

By |2018-04-17T09:21:43+02:00April 17th, 2018|Financial Management|0 Comments

Financial Management – When can salaries be a sales cost?

Last week we looked at income and the various types of income as part of our mini-series on the elements of your financial statements. Today we’re looking at a very misunderstood area – the cost of sales.

Many people think that cost of sales is the cost of the goods you have bought (or made) to sell to customers. It is not – the cost of sales is the cost of each product that has actually been sold. This means that if you have paid a supplier for stock, that is not yet sold, the cost won’t be included in the cost of sales.

This is important because of where the cost of sales is reflected in the financial statements. Cost of sales is an expense which reduces your profit, and therefore your tax. Thus it should not be overstated, by reflecting all the purchases during the year. The cost should match the sales, in other words, if you sold 10 items, the sales price for those items shows as income, and the cost of those 10 items shows as an expense. The cost of any unsold items sits on the balance sheet as stock on hand.

What if you don’t sell stock, what if you offer a service? Then according to the accounting definition, you DO NOT have any cost of sales. However, this is where pure accounting and the needs of management differ.

The real cost of making the sale may include any number of expenses depending on your business. For example; a service business may consider their technical staff to be a cost of making sales. What about travel and entertainment? Management reporting could include all of these expenses as the cost of sales to help understand how the business makes money and how well it is doing that. No-one said that the management reports needed to be in the same format as the annual financial statements. The accountants can re-classify the expenses for compliance purposes, as long as management has the necessary information to make decisions.

Next week we’ll look at the net result of sales and cost of sales, gross profit.

If you’re not getting the information you need from your management reports, perhaps they read too much like an accountants report, give us a call to help you re-format them into something useful

By |2018-04-10T09:02:06+02:00April 10th, 2018|Financial Management|0 Comments

Financial Management – When is income really income?

Over the next few weeks, we’ll be looking at the various pieces of the puzzle that are the financial statements, so that you understand where to look for something, where information should go, and what you can get out of the information presented. Today we’ll look at INCOME, which is at the top of the income statement, usually the place people start.

Not all receipts (into the bank account) are income. This is important to understand, especially if you are managing your business from your bank account. Some receipts are the payment from your customers for your product/service, but receipts may also be of interest earned, repayments of a loan you’ve given, or reimbursement of expenses you’ve paid. The last two should be set off against the original payment and not recorded as income in your financial statements.

In accounting terminology, there are 3 main categories of income:

  • Sales of your product or service (which is obviously the most important for most businesses)
  • Passive income generated on your assets, this includes interest on your bank accounts, interest charged on loans given to others, dividends on investments, charges for using your equipment or vehicles, amongst others
  • Other income, this is income that is not generated by the business, such as grants or donations or profit on disposal of assets

In your annual financial statements, there will be a line for each of these, if relevant. However, from a management point of view, you may want to break them down further and reflect a number of lines for sales in your management statements. You may have separate product lines, divisions, or locations. It can be useful to see the sales at this level to understand what is working in your business. Many accounting packages allow you to print a report showing the sales per product/service, which can be very helpful to review regularly.

Although income will be summarised in your annual financial statements, management should be engaging with the income at a more detailed level on a regular basis to assist in making business decisions.

Next week, we’ll look at cost of sales and the meaning of gross profit.

By |2018-04-10T09:25:57+02:00April 3rd, 2018|Financial Management|0 Comments

Don’t get caught with mothballs in your wallet

‘Cash is king’, says everyone to a small business owner. It’s not a platitude, it is true. It doesn’t matter what your sales are if your customers haven’t paid you.

As a business owner, you have it down to a fine art the ability to pay your creditors at the last minute, while chasing your debtors furiously. You’ve mastered the art of putting people off just a few more days so you can pray earnestly that enough money comes in, just in time. You are the King/Queen of last minute and stretching the last cent.

Imagine, it’s one of THOSE months, and you get a call from your accountant reminding you that your provisional tax is due in 2 weeks’ time. After you’ve sat down, had a zanex or a cup of coffee, you scroll through your contacts list to see who you can call, what plan you can make, how you can scrape to get the cash ready in time. As you know, SARS are the worst creditors, they really make you pay if you are late!

Is this your reality? It shouldn’t be. You know exactly what you need to have in the bank to make it through the month, but do you know what the annual (once a year) costs are, and when to expect them? Things like subscriptions, licence fees, membership fees, provisional and income tax, annual financial statements, etc. The annual costs should be included in your diary at least a month in advance to avoid any surprises.

It is also important to plan for these large amounts. Seldom do you have the spare cash lying around just when you need it? It is important to set aside a contribution towards the cost each month. If you provide for it now, regularly and without fail, the money will be there when you need it. And put the provision in a separate bank account so you’re not tempted to use it!

Give us a call if you need some assistance establishing what costs you need to keep track of and how much you should set aside for them.

By |2018-03-27T10:18:49+02:00March 27th, 2018|Financial Management|0 Comments

Your business should perform like an athlete

How do you define performance in a business; more specifically how do you define financial performance? Good performance is very easy to recognise for sports people or athletes. There is a target that they are working to beat; say their last marathon time, or their personal best, or the world record, or even just their rival’s score. It is obvious when they have performed well and when they have underperformed. It’s also obvious from the celebration – the fist pump in the air or the lap with the flag.

What can we learn from the world of sports when it comes to the financial performance of our companies? The most under-rated lesson is to CELEBRATE good performance or even just better performance. We are motivated to achieve more, to do better, when we recognise the work that has already gone into our performance and identify the things that have gone right or are working well. Celebrating also gives us a moment to stop and reflect on what we have changed/improved that has made all the difference, and imagine how to do more of that thing.

Another lesson from the world of sports is how to tell if performance is good or bad. There is always a TARGET that the person is trying to reach. In business we often consider performance to be the profit of the company. In fact, the income statement (showing the profit) is now called the Statement of Financial Performance. Setting a target for the profit of the company is a good idea. However, it is also important to look at the variables/elements that generate that profit, as they all need to work together to reach the target you have set. Consider setting realistic targets for your costs, for your turnover, for specific products. What about the management teams, sales people and internal processes that are necessary to achieve your goal performance?

Set up a meeting with our financial management team and we will help you to identify the cause and effect relationships in your financial flow, to establish where you should set targets for improved financial performance.

By |2018-03-19T16:51:57+02:00March 20th, 2018|Financial Management|0 Comments

Budget Speech 2018

This week we got our first glimpse of the new government’s vision for our future with the budget speech 2018. I am excited about not only the aspects of the speech but the enthusiasm that it has brought to the confidence of our economy. We are all still waiting for the new Cabinet, expected shortly, and the new direction that will bring.

But, I am not alone, when I feel a new wave of economic energy and growth in our small business sector. We at EM Solutions are gearing up for this new season of innovation and business development. Come climb on the bus and ride with us.

For those who are still confused or missed the budget speech, here is a copy of the PWC budget summary that highlights the entire things in just a few pages: much easier than trying to analyse it from long documents and drawn out commentaries.  2018-budget-pwc-highlights

For another view: read the Fin 24 article here: https://www.fin24.com/Budget/budget-in-a-nutshell-new-hope-amid-vat-and-other-tax-hikes-20180221

We will be assisting our clients with the VAT increase and other related issues in the coming weeks, so if you have any questions concerning these or other financial management issues, drop us an email.

By |2018-02-23T11:30:02+02:00February 23rd, 2018|Financial Management|0 Comments

A picture is worth a thousand numbers

When you are asked for your financial information, most business owners think TAX, which is very pertinent at the moment, since there was a tax deadline at the end of January and there is a provisional tax deadline coming up at the end of February.

But financial information shouldn’t only make you think about your taxes and complying with SARS’s requirements. There are so many other important reasons to understand the finances of your business. If you’ve ever watched an episode of Dragon’s Den, you’ll know that Peter Jones always wants to know the numbers of the business, and it is fatal if the business owner doesn’t have the right information at their finger-tips!

You might not be entering Dragon’s Den any time soon but it is still important to know your numbers; what your turnover is so far and in the last month, what profit you’re making, which are your most successful products, who are your worst paying customers.

As creative entrepreneurs, we often shy away from the numbers, but the information tells a picture and sometimes a picture (or graph) can tell the story. We are using graphs more and more when communicating financial information to clients, as it is easy to see what happened and where you are going, without engaging with the numbers.

If you are not getting a clear picture of your accounting system and financial reports, give us a call and we’ll use the numbers to help you tell your story.

By |2018-02-06T16:01:43+02:00February 6th, 2018|Financial Management|0 Comments

Tax Season Scams – don’t get caught      

As we near the end of January we are busy completing a number of our client’s online tax submissions on eFiling before the 31st deadline on Wednesday. This is not a complicated process as the new ever-improving eFiling system is user-friendly and fast.

All one needs is the right information, documents and a little know-how in order to do the online submissions. The system gives you an instant review and an online calculator will give you an estimate on your result of a pay-in or pay-out.

After completing a number of these in our offices and then doing one at home for my wife, we have noticed a few issues that people just need to take note of in order to avoid being duped by scammers and phishing sites.

Firstly the banks and SARS will never ask you to do anything via an SMS. This includes validation of accounts, ID number or tax information.  Any queries that they may have will be sent to you via email and be detailed on the eFiling website.

Any refunds due will be deposited directly into the bank account you have submitted on your tax return. You will not have to do any further work, including verification of your details.

My wife got an SMS just a few days after her return was filed asking her to please click on a link and complete the bank details in order to facilitate the refund process. Firstly this is wrong and an obvious scam, but very interesting that it only took the scammers a few days to get her information from the SARS site and then set up this scam. A little scary to how insecure our information is in the SARS process.

Please be careful: if in doubt, contact us for any information about your tax returns or check directly on the eFiling site for any additional documentation or information they may require in order to complete your return.

Oh, and remember that the deadline for income tax returns for all provisional taxpayers is Wednesday this week.

By |2018-01-29T11:52:49+02:00January 29th, 2018|Business Resources, Financial Management|0 Comments
Go to Top